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In July 2000, Airbus Industries' supervisory board is on the verge of approving a $13 billion investment for the development of a new super jumbo jet known as the A3XX that would seat from 550 to 1,000 passengers. Having secured approximately 20 orders for the new jet, the board must decide whether there is sufficient long-term demand for the A3XX to justify the investment. At the time, Airbus was predicting that the market for very large aircraft (VLA), those seating more than 500 passengers, would exceed 1,500 aircraft over the next 20 years and would generate sales in excess of $350 billion. According to Airbus, it needed to sell 250 aircraft to break even and could sell as many as 750 aircraft over the next 20 years. This case explores the two sets of forecasts and asks students whether they would proceed with the launch given the size of the investment and the uncertainty in long-term demand.

learning objective:

To illustrate the basic economics of large projects and the complexity in estimating even top-line demand for products with useful lives of up to 50 years. To illustrate the role of governments in large projects, both as investors and as customers. Finally, to explore the competitive dynamics between a monopolistic and a potential entrant in which entry costs exceed $10 billion.

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Harriett Green, the newly appointed CEO of Thomas Cook Group, faces a daunting set of business and financial challenges at the 171-year old UK travel services company. The company has lost almost £600 million in the last three-quarters; has seen its stock price fall from 230 pence to a low of 8.8p in the past two years; and had seen its bonds trade down to as little as 40% of face value. In just a few weeks the company's license to operate is to be reviewed by the United Kingdom's Civil Aviation Authority, competitors are publicly questioning the company's viability, and seasonal working capital needs are about to peak. With the company's very survival at stake, Green must devise a turnaround plan that will return the company to financial health. Any plan must address the company's high-cost structure, raise substantial new capital, fix the balance sheet, create a profitable growth strategy, and build a more effective organization and culture. But achieving all of these objectives within the short time available will be a major challenge.

learning objective:

Design and execution of a complicated corporate turnaround; analysis of company profitability and solvency; valuation of impact of corporate restructuring; strategy for leading an organization during a financial crisis.

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In August 2011, Morgan Brothers Bank was issuing a $2.5 million reverse convertible note with payoffs linked to the price of Molycorp's common stock. These financially engineered securities were just one of many kinds of structured notes available in the retail market. Investors must decide whether the notes were fairly priced and whether they offered a favorable risk-return trade-off.

learning objective:

This case allows students to analyze the market for structured products in general and one kind of structured product--a reverse convertible note--in particular. Using replication, they must decompose the security into components. Then using option pricing and discounted cash flow techniques, they must determine a fair value for the security. Finally, they must decide whether a high-net-worth client should to invest in the product.

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Molycorp, the Western hemisphere's only producer of rare earth minerals, was in the middle of a $1 billion capital expansion in its effort to become a vertically integrated supplier of rare earth minerals, oxides, and metals. After reporting lower than expected revenues and earnings for the second quarter of 2012, management needed to design a new funding strategy for the firm. In August 2012, Molycorp announced it would issue $120 million of equity and $360 million of convertible debt. To facilitate the issuance of convertible debt, the firm entered a ''share lending agreement'' with Morgan Stanley whereby Morgan Stanley would borrow shares from Molycorp in a transaction referred to as a ''Happy Meal''. The goal was to help convertible debt investors ''hedge their respective investments through short sales.'' The challenge of the case is to understand why Molycorp used this financing strategy and what impact it would likely have on the firm, its prospects, and its stock price.

learning objective:

This case helps students think about the relation between a firm's business strategy and its financial strategy. In this instance, Molycorp has a large funding need to achieve its goal of becoming a vertically integrated supplier of rare earth minerals, yet it also has a leveraged balance sheet. Management decided to fill this funding need by issuing equity and convertible debt, and by lending shares to investors. The case challenges students to understand if (and under what conditions) this financing strategy makes sense, and when it is reasonable to fascilitate short sales against your own firm.

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Molycorp, the western hemisphere's only producer of rare earth minerals, was in the middle of a $1 billion capital expenditure project in its effort to become a vertically integrated supplier of rare earth minerals, oxides, and metals. Yet it had just reported lower than expected revenues and earnings for the second quarter of 2012. In response to the announcement, its stock price fell 29% (its stock price had fallen from $77 to $11 in the past 18 months). The weakening financial performance was due in large part to falling prices for rare earth minerals. With less internally-generated cash flow available to fund the project, management had to decide: how much capital to raise, what kind to raise, and when to raise it. These decisions would determine its capital structure, at least in the short term, as well as its ability to implement its business strategy.

learning objective:

This case can be used as a comprehensive review for both introductory and advanced corporate finance courses. It covers a variety of topics including capital structure, DCF valuation, security issuance, debt pricing, option pricing, payoff diagrams, and sources & uses of cash, and does so in a very interesting setting. The demand for rare earth minerals is rising dramatically due to their unique electrical, mechanical, and magnetic properties while supply is influenced by a variety of economic and political factors (e.g., global trade, Chinese export quotas, new mines, conservation, and speculation). The case also highlights the relationship between the firm's business and its financing strategies, and challenges students to design a financing strategy that enables the firm to implement its business strategy while not exposing it to excessive financial risk.

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Provides an introduction to the fields of project finance and infrastructure finance, and gives a statistical overview of project-financed investments over the years from 2009 to 2013. Examples of project-financed investments include the the Kashagan oil field development in Kazakhstan (1997), the $1 billion Port of Miami Tunnel (2007), the $54 billion Gorgon liquefied natural gas (LNG) project in Australia (2009), and the $6 billion Oyu Tolgoi copper mine expansion in Mongolia (2014). Globally, firms financed a record $415 billion of capital expenditures using project finance in 2013, and the use of project financed-investment has grown at a compound rate of 8% over the past 15 years despite several macroeconomic crises.This note focuses primarily on private sector investment in industrial and infrastructure projects and contains four sections. The first section defines project finance and contrasts it with other well-known financing mechanisms. The second section describes the evolution of project finance from its beginnings in the natural resources industry in the 1970s, to the U.S. power industry in the 1980s, to a much wider range of industry applications and geographic locations in the 1990s and 2000s, and most recently to infrastructure finance in the 2010s. The third section provides a statistical overview of project-financed investment over the last five years (2009 to 2013) and looks at industry, project, and participant specific data. The third section also provides recent data on infrastructure investments and public-private partnerships. The final section discusses current and likely future trends.

learning objective:

This background note provides an overview of project finance, from its historical beginnings to current practice and likely future trends, as well as an introduction to infrastructure finance. The note should be useful for both students as an introduction to the field, the terminology, and the institutions; and to practitioners as a source of industry date.

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On February 21, 2013, TELUS announced a proposal to convert the firm's non-voting shares into voting shares on a one-to-one basis, thereby eliminating the firm's dual class structure. Shareholders were scheduled to vote on the proposal at the firm's annual general meeting (AGM) on May 9, 2013. Despite strong support from management, the board, two proxy advisory firms, and several large shareholders, the proposal was opposed by Mason Capital Management, a New York-based hedge fund. Mason, which controlled almost 20% of the voting shares and a large short position in the non-voting shares, had filed a dissident proxy circular recommending that shareholders vote against the proposal based on both procedural and substantive grounds. With the success of the vote in doubt, the board had to decide what to do. Should they proceed with the vote as planned, postpone the vote with the intention of re-introducing the proposal at some point in the future, or cancel the proposal for good? And what should they do with Mason, which management viewed as an "empty voter" in this matter?

learning objective:

Although this case was written for an advanced corporate finance course at Harvard Business School, it is also appropriate for other courses such as Investment Strategies, Alternative Investments, Hedge Funds, Corporate Governance, and Boards of Directors.The case has four pedagogical objectives: 1) highlight the complex and poorly defined, yet increasingly common and controversial practice of "empty voting" (or equity decoupling); 2) provide an opportunity to discuss the mechanics and the economics of short selling as implemented by an event-driven hedge fund; 3) raise several fundamental questions about corporate governance-are voting rights valuable and, if so, how valuable and why? and 4) expose students to other finance topics (liquidity, proxy contests, shareholder activism, and dual class structures) as well as important institutions (special committees and proxy advisors like ISS and Glass Lewis).

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